The recent hacking of India's banking system that affected 3.2 million debit cards has led many to not use plastic or even engage in electronic transactions, despite the convenience.Gayatri Nayak&Saikat Das | ET Bureau | October 24, 2016, 10:02 IST

Likhiram Mandhare got text messages alerting him to two withdrawals of Rs 20,900 each last month. He called his bank immediately, alerting it that he had not authorised the transactions.

The businessman, who runs an engineering firm in Nagpur, was lucky ­- his bank traced the withdrawals to China and credited back the amount. Mandhare has decided to stop using his ATM card ­and he's not alone.

The recent hacking of India's banking system that affected 3.2 million debit cards has led many to not use plastic or even engage in electronic transactions, despite the convenience. Technology's many blessings come with risks, they reckon.

This lack of confidence in the banking system's ability to protect customers from online fraud will be a setback for the ambition of the government and the Reserve Bank of India to create a cashless society. A cashless economy lowers costs and makes it easier to track transactions and tax them, thus squeezing the black economy .

Like Mandhare, Debapriya Datta will now withdraw money from the local bank counter rather than making use of ATMs. The 23-year-old student of film studies in Gurgaon turned a sceptic about the safety of ATMs after her father, who lives in West Bengal, told her about the security breach.

If the trend continues, currency in circulation could surge further, impacting monetary transmission.

“I am reluctant to use debit cards as ways of swindling people are expanding fast,“ said Dinesh Kumar Dube, 49, a Mumbai-based building contractor. “With the latest scam, I feel justified. Now, I prefer to keep cash as it will eliminate the possibility of us ing debit cards. The world is not going to change with out debit or credit cards.“

The central bank is grappling with a higher-than-usual rise in cash in circulation, which hit a record Rs 17.75 lakh crore on October 14, up 17.4% from the year earlier, compared with a 10.7% rise at that time last year. In the two weeks between September 30 and October 14, cash and currencies rose by Rs 46,830 crore, which is significant, given that festival demand for cash will have picked up in subsequent weeks.

“Cash circulation in the system is higher as real estate transactions are slowing down along with sluggish bullion business. But, debit card frauds may have some impact on public sentiment to keep more cash in hand instead of banks,“ said Devendra Kumar Pant, chief economist and senior director, India Ratings.

“The scene is reminiscent of an event in 2008 when public had rushed to withdraw cash from a particular bank just out of fear psychosis. Large-scale cash withdrawal and people losing money is unlikely ."

Money outside the banking system is cash over which monetary policy doesn't have influence given that it's outside the banking system.In its annual report released in August, RBI noted that the “rise in currency in circulation reflects the interplay of several factors such as jewellers' strike, festival-related demand, elections and the like ­­ that are difficult to disentangle quantitatively with precision."